Greg Mankiw Discovers the Math and the Arithmetic on the Same Day

Raising taxes is a good idea after all. In fact, it is now quite necessary, according to former Romney flack and alleged deep thinker Greg Mankiw of Harvard University. (Whose introductory textbook in economics may go down in history as the single greatest disinformational success of all time.)

In this Sunday’s New York Times, Prof. Mankiw bravely challenges what he takes to be the newly prevailing group-think in Washington – namely, the bi-partisan idea that “taxes on the middle class must not rise.” This is “Bad Math”, we are told. This does not accord with the “laws of arithmetic” – at least not as Prof. Mankiw understands them. It is, he concludes, our government’s stubborn reluctance to tax the non-rich which explains why “the political process has become so dysfunctional.”

The set-up is familiar – formulaic, even. For the “next several decades”, thanks “largely to entitlement spending”, the ratio of U.S. government debt to G.D.P. will rise “substantially.” If this account seems a little vague, don’t worry – it gets vaguer still. The increased ratio of debt to GDP “can happen for a while, or even a long while, but not forever. At some point, investors… will start questioning our ability to pay debt service without creating steep inflation. It’s hard to say precisely when this shift… will occur, and even whether it will strike in this president’s term or the next, but when it does, it won’t be pretty.”

On that possibly far-off, but still unpretty day, Mankiw concludes darkly, the nation will “find itself at the brink of an unprecedented financial crisis.”

On one level, this entire exercise begs the question: when is a prediction so imprecise – so hedged round with ifs, ands, buts and other qualifications – that it fundamentally ceases to be a prediction, becoming, instead, the sort of brooding, shamanistic incantation we might more likely associate with the reading of some unlucky sacrificial sheep’s entrails? Would the New York Times publish anything remotely this vague as “informed commentary” in any other field of investigation except economics?

It would be completely fair to paraphrase Mankiw was follows:

“At some indeterminate, and largely indeterminable, future point in time, which may occur within four to twelve years, but which may very well not happen until substantially later on, and all the while assuming that U.S. government policies do not change significantly during that time, it is inevitable that investors will begin questioning the capacity of the U.S. government to service its debts.”

The most interesting thing about this familiar invocation of financial doom may be its sheer banality. It has acquired the status – even the cadence – of ritual. None of it needs to be explained or demonstrated anymore. No math – no arithmetic – need any longer be set forth. It is enough to simply pronounce the magic spell, and genuflect. And, sadly, Prof. Mankiw is only too right in this. There is probably not one politician, pundit or dry-behind-the-ears policy wonk in all of Washington who would take issue with one word of it.

Of course, it doesn’t particularly matter what policy or set of policies Greg Mankiw happens to be selling today. Just yesterday, he was selling the Romney/Ryan line that all of the Bush tax cuts, without exception, should be made permanent as a matter of bedrock moral principle – along with an additional 20% across-the-board cut (also permanent) . The good professor was unconcerned, just a month ago, that these much, much larger tax cuts might somehow lead to “unsustainable” deficits later on. But then, the Romney formula would still have skewed tax benefits wildly toward the ultra-rich. And that is the game: give “everybody” a tax cut, but then notice that since middle-class benefits are the ones which are thereby starved, why then it is only natural – only fair – that middle-class taxes rise to cover “their own” costs.

As an extended exercise in the fuzziest of fuzzy math, Mankiw’s argument soon settles on just one or two statistics. But he can’t resist a small side trip over to fuzzy aesthetics along the way. “Fairness,” Prof. Manki intones, is, “like beauty, in the eye of the beholder. Unfortunately, peoples’ judgement is often based on anecdotes that distort rather than illuminate…” He then proceeds, unaware of any irony, to recount exactly two anecdotes which, well, rather do tend to distort more than they illuminate.

“In 2009… the richest 1% of of Americans paid 28.9 percent of their income in federal taxes… (That includes income taxes, both individual and corporate, and payroll taxes.)” Of course, leaving aside whatever calculations attribute *corporate* taxes to rich *individuals*, the whole point of the Romney tax return escapade was was to peel back the terminology whereby a large percentage of the money billionaires take in every year is not counted as “income” *at all*. Are we supposed to believe that Mitt Romney is an aberration – some sort of particularly-good-at-tax-evasion guy, who can whittle his tax liability down below 13% when the rest of his class bites hard and pays almost 30%? Is there a smell test in the house?

Anecdote (or damn lie) number two concerns “the middle fifth of households”, who, according to Mankiw, pay about 11% of their income in federal taxes. And what could be more reasonable than this, in describing the lightness of middle-class taxation – to focus on this very middle-of-the-middle – the middle fifth of households? Of course, all the rest of the political class, and all of the rest of the political debate, defines “middle class” as families making less than $250,000 per year. But such a cut-off point, as the debate over our fiscal-cliff follies never ceases to remind us – means that the “middle class” extends far up into the very top quintile, extending as high as 97% of households – almost all of which are vastly more affluent, and pay significantly higher taxes than the narrow group Prof. Mankiw focuses on. Focuses on, that is, in order to make his argument sound just a tiny bit less specious than it quite obviously is.

Conclusion: anyone who trusts Greg Mankiw to fairly state an argument about taxes, math, arithmetic or anything else has either not been paying attention or else may be severely challenged, aesthetically. Beauty may be in the eye of some mere beholder. Fairness belongs to us all.

28 Responses to Greg Mankiw Discovers the Math and the Arithmetic on the Same Day

Haha great post, Dale. So, investors may or may not lose trust in the US dollar, but this may or may not be in the next 10-20 years, and unfortunately we just don’t have any data to support it.. maybe.

In other news, Washington has only done marginal damage to the country in the near term with this latest Senate deal. Bravo for marginal damage! Break out the champagne, payroll taxes going up 2% with tens of millions unemployed.

I call this the Austrian method of economic arguing. All philosophy, no science.

The Austrians contributed more than marginal analysis and faith in the existence of an organic, self-organizing, self-regulating, mystical free market to neoclassical economics. They taught neoclassical economists how to produce this type of muddle.

Mankiw makes no mention of US military spending, which is the highest in the world and is roughly ten times the amount spent by the next ten countries combined. He is so obviously a capitalist shill, it is laughable. He has sold himself to the highest bidder.

I’ve been reading about this a bit, no expert, but here’s the gist i get:

All financial transactions at the fed, fedwire/fed securites/ach etc. totals about 1quadrillion a year. 1/2 of 1% tax would equal about $5T/yr in tax revenue. current budget is about $4T. we could balance budget and pay off $1T/yr in debt. income tax with all loop holes is eliminated.

I don’t know all the particulars, but on the surface sounds good. It’s time to stop taxing income and start taxing money. it would seem much more efficient.

although what would we all do if we couldn’t argue over taxes anymore?…:-)
thks

Why not start with eliminating government priviledges* for the banks first? Why take with one hand when you’re giving with the other?

People assume way too much when they assume we need banks at all, especially government priviledged banks.

* e.g. Governemnt deposit insurance, a legal tender lender of last resort, borrowing by the monetary sovereign, lack of a risk-free fiat storage and transaction service provided, as it should be, by the monetary sovereign itself.

FB, i’m with ya on taking back sovereign rights of creating money. With the computers today, in theory everyone can have an account directly with the fed. why the govt feels obligated to pay interest to borrow the money it alone is allowed to create boggles my mind.

but i can say this, we’re getting closer to pulling back the curtain on the wizard of oz.

we have the ability to eliminate 50% of the debt by minting a couple trillion dollar coins and we won’t do it…duh.

“The few who could understand the system will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while on the other hand, the great body of the people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”

Folks here who really care about the disinformation in Mankiw’s bloviations may want to visit the Amazon book store and leave comments about his $175 text book claiming to be an Introduction to Macroeconomics. No where in his “textbook” does he refer to the implications of abandoning the gold standard.

Jus Sayin’

Jack Foster’s implied question; why we don’t use the PPCS solution is because Geithner doesn’t want the bond vigilantes to lose out on the interest stream generated by the current dysfunctional pay-for-your-own-money scam. I asked Dean Baker why O wouldn’t do the PPCS thing and he said it had already been rejected. Having worked in the E.O.P., I can easily believe that O never got a chance to consider it. Geithner just “spoke” for the President and dismissed the option as not helpful to his masters.

The obvious answer is subchapter S corporations, but there are other corporate situations where the sole shareholder can rightly be said to have paid all the corporate tax.

“a large percentage of the money billionaires take in every year is not counted as “income” *at all*”

No, it is counted as income, it is just not taxed the same way as wages, interest, and other sources of income are taxed. Romney and Buffet get income from capital gains and dividends, which are taxed at lower rates.

“all of the rest of the political debate, defines “middle class” as families making less than $250,000 per year.”

I’ve never heard that. I don’t think anyone considers a family, or even an individual, making $10,000 a year to be “middle class”. The middle 20% is a very good definition, although I think the middle 60% is better.

I don’t see anything wrong with his statement of facts. He errs in not recognizing monetary sovereignty and other principles of MMT, and it would be more persuasive of you to attack his statements on that level, and less personally.

Could “a large percentage of the money billionaires take in every year is not counted as “income” *at all*” refer to unrealized capital gains? These are specifically not counted as income and they are not taxed.

Still people can find ways to use this unrealized gain in indirect ways. There could be a tax on increase of wealth, which would catch these unrealized gains.

There could be, but there is not, and for good reason. Consider the farmer who has a modest income from a very valuable plot of land. If each year he had to pay tax on the increase in value, he’d likely have to sell off a chunk of it to raise the money for the tax. Many small businesses could be affected in the same way.

OTOH, a tax rebate for decreases in wealth would have helped some underwater homeowners over the past few years.

There are some good reasons not to have a tax on increase on wealth, some of which you mention. However, there could be protections against these problems. We could have a high threshold on wealth gain – say $100 million. The percentage tax could be fairly low and still collect a lot of money that is now not being collected. There could be a write-off of the unrealized gain tax when the gain is taxed as realized.

Right now people can contribute stock with unrealized gain to charity and get a tax credit for the tax they never paid on the unrealized gain. It’s a real boondoggle to get a tax credit for tax you never paid when someone who contributes cash after realizing the gain gets a tax credit for a tax actually paid. In essence we are paying the person out of our tax money to make a contribution. I’d rather have such payments be part of a program that was approved by Congress and the President rather than decided on the whim of the individual contributor. I only mean this last statement to tax write-offs on taxes that were never paid, but would have theoretically been paid with a slight change in the circumstances.

Yeah, well you get to deduct (not a credit, a deduction ) the value of the gift at the time you make it, not just the cost of acquiring it. That value might include an unrecognized capital gain, which would not be taxed. But that doesn’t take any money away from anyone else, if you believe in MMT. It just removes less money from the economy, which is a good thing.

At a $100M threshold, I would withdraw my objection, but then the revenue raised would be minimal. Also, if the asset were not sold before the owner died, there would have to be estate tax adjustments. Having a tax code littered with complexities that raise little revenue is only good for tax lawyers and accountants.

I’m not familiar with all details, but it sounded good on the surface. So, you eliminate all income tax and instead tax all money transactions at like some sub .5% number and you can get several Trillion in taxable base. This sounds like the ultimate base broadening, especially as income from labor is a declining portion of the gdp.

We’re fundamentally talking about the bathtub analogy. Overflow, when to drain, and by how much are the issues. The simplest managment tool is to pull the plug on fractional reserve by adjusting the ratio. Since sovereignty does not depend upon revenue to spend, taxes Federal State, and Local are never really needed to fund expenditures. The sole issuer of the currency distributes its fiat money to all political jurisdictions debt free. When too much credit is created and inflation threatens pull the plug a little on credit creation.

As I understand it, the Government puts the fiat money into circulation by buying stuff, paying salsries to government employees, or making payments such as social security or paying for your medical care through Medicare. So one way to pull liquidity when it needs to is to stop buying stuff. That method is in addition to playing with reserve requirements. When there are bonds sold by the government, they can sell more bonds to suck up liquidity. You could argue about the cost, the speed, and the efficiency of the various methods at the time that liquidity needed to be sopped up. The same is true when liquidity needs to be added. You can purchase more stuff through various fiscal stimulus packages or you could buy back the bonds that are in public hands.

On one level, this entire exercise begs the question: when is a prediction so imprecise – so hedged round with ifs, ands, buts and other qualifications – that it fundamentally ceases to be a prediction, becoming, instead, the sort of brooding, shamanistic incantation we might more likely associate with the reading of some unlucky sacrificial sheep’s entrails? Would the New York Times publish anything remotely this vague as “informed commentary” in any other field of investigation except economics?

If we apply logic to the pseudo science of Economics and the way it forms the basis of the Capitalist political system that currently dominates the world we derive a number of conclusions.
The description, “pseudo science” is used advisedly because; when looking at classical/neoclassical economics, it is difficult to determine its intent. (1) In the absence of a stated purpose, the things it does and doesn’t do need to be examined.
Economists sometimes think about what they are doing. When their thinking conforms to well-known norms of logic and is based on true premises, it is rational, when it doesn’t, it is not. The thinking, not the result, is the deciding factor. Rational people judge theories, policies, and practices by how well they satisfy the intentions which led to their implementation. Unless the intentions are known, no sound judgment can be made.
Over the past 200 years that classical economics has been used as the basis of orthodox capitalism, it has not brought a stable level of prosperity to the peoples in any of the countries where it is practiced. Spurts of apparent prosperity have been continuously destroyed by economic crashes that, over and over again, have ruined the lives of millions.
Maybe, its intent has never been the promotion of the people’s prosperity?
When viewed in a completely objective manner, the overwhelming evidence confirms that, for the past 200 years, the intent of capitalism has consistently been to protect the wealth of the privileged and to maintain the status quo. Today, in 2013, this evidence is even more starkly presented with the international kowtowing to the banking fraternity around the world.

It should be said at least once that the rate of income tax paid to the rich should be measured not just as a proportion of their income but also in relation to aftertax income. The question should be: does after-tax income bear any relation to what they actually need to keep body and soul together? Why should we allow a super-rich 1% ruling class enough money to control us and our democracy? Money is power and they have too much of both. It misses the point, the demand that they just pay their “fair share”.

It would be sort of hard to take something from someone who doesn’t have it, don’t you think? Anyway, I was asking what your preference was. I think progressive taxation like we have today is fair, and generally doesn’t do too much damage to incentives. I surely wouldn’t have put in the time and effort that I did when I was working, if I knew it would all be taken away and I would have the same no matter what I did.